The lender’s interest rate for a hard money loan is likely going to be between 8 and 18 percent of the loan’s value. For a conventional 30-year fixed rate mortgage, a borrower in today’s market is going to be looking at an interest rate of around 4.125%1. However, a 30-year mortgage is actually not really comparable to a hard money loan, and the two types of loans offer different advantages to the borrower. The hard money loan offers many pragmatic advantages for investors who need quick approval to finance a residential rehab or fix & flip development, or to begin ground-up construction.
The real estate market moves quickly, and successful developers rely on hard money for the quick approval process that can set their project in motion. While conventional lenders may take weeks or months to approve a loan, hard money lenders can approve within hours or days of the loan application. This is a business advantage for developers that far surpasses the cost of the higher interest rate. Additionally, having cash on hand from the hard money loan at the bargaining table can be advantageous for developers as they’re closing on development properties.
Short Loan Term
The term of a hard money loan is generally months rather than years. The 30-year mortgage is an effective financing option for homeowners shopping to finance a primary residence where time is not of the essence, and the borrower is not planning to resell or refinance the property immediately. Hard money serves an entirely different niche in the lending market, much more suited for bridge loans, construction loans, fix & flip, and other ventures where the developer is going to be reselling or refinancing the property shortly after acquiring and renovating it. Often, developers will refinance the property post-renovation at a higher appraisal value, affording them a much higher allowable loan amount.
Developing Trust with your Lender
Experienced developers often work with the same hard money lender from project to project, and develop a professional rapport that may lower the interest rates over time. Hard money lenders have a unique freedom in that their interest rates are not tied to the rates set by Fannie Mae and Freddy Mac. It’s an independent business decision that can take a comprehensive look at the borrower’s development history, rather than relying purely on conventional metrics like your credit score.
Socotra Capital is California’s premier hard money lender for your real estate investment needs. Contact us today to get started on your quick approval!
- “Today’s Mortgage Rates and Refinance Rates.” Mortgage Rates Today. Accessed December 14, 2015. https://www.wellsfargo.com/mortgage/rates/ ↩